The credit rating agency Standard & Poor's has decided to downgrade America's credit rating. America's AAA credit rating, they've downgraded it fallout from the debt crisis. Allan Chernoff is in New York joining us. Allan, how unexpected is this?

CHERNOFF: This is not shocking at all. It is shocking from a public relations' standpoint, but S&P actually had warned of this back on July 14th when they said there was a better than 50 percent chance they were going to do this and they've pulled the trigger.

It wasn't easy for them, but they've done it. What they're saying is that the deal struck this week to avoid default, to raise the debt ceiling and cut spending simply isn't sufficient. It's not enough to stabilize the debt situation of the United States as they term it, as S&P terms it.

The medium-term debt dynamics of the U.S. they want to see more spending and they say they're making a judgment on the politics that occurred in Washington this past week, the disarray, the fighting, and the fact that it took until the very last minute, almost, for them to come to a deal.

And they're saying we don't believe that the Congress and the administration will be able to leverage their agreement into a broader, fiscal consolidation policy so they're just giving a thumb's down to what's occurred in Washington over the past week, down one notch to AA-plus.

COOPER: And now it's bad news, but it could have been worse in terms of levels of downgrade. This is just, as you say, one notch?

CHERNOFF: It's one notch, but they're saying within two years, they may go down another notch. If they don't see enough spending cuts, if they don't see enough fiscal consolidation in Washington so they're giving a warning that we may not be done with this. So it's really quite a step.

COOPER: Is their biggest concern long-term debt?

CHERNOFF: Yes. They're worried about this debt overhang for the United States, absolutely, as a percentage of GDP, of gross domestic product. They're saying -- look, the economy is fairly uncertain. What if the economy shrinks and our debt load increases? It puts the United States in an even more tenuous situation.

COOPER: What sort of impact will people at home, consumers feel, from this?

CHERNOFF: Well, it certainly possible that some interest rates could rise from this. Really, the more likely impact is that we could have more pressure on the stock market come Monday morning. We've already had a horrific week, but this certainly is a blow to the United States without question.

In terms of the treasury market, right, that's where it should really hit. That, after all, is how the United States borrows money. We issue bonds, notes, short-term bills to investors. They give the United States their money and the United States says -- we'll pay you back with interest.

So will people run away from those? Well, unlikely. The full fate and credit of the United States still means quite a bit and, indeed, some other major nations have seen their credit rating cut and it didn't have all that much impact on those countries, including Japan.

COOPER: In a moment, I want to talk with you, Allan, about what it may mean for states and also for Fannie Mae and Freddie Mac, other things like that whether they may face downgrades as well.

But I want to bring in our John King here. John, you've been talking to your sources in Washington. Was this a surprise for the Obama White House? Did they have much advanced notice of this?

JOHN KING, HOST, "JOHN KING USA" (via telephone): Anderson, here's what I'm told, at 1:30 this afternoon, S&P sent notice to the Treasury Department and the rest of the administration that they were planning to make this decision.

I'm told by a senior administration official that Treasury analysts quickly caught what they caught call a glaring mistake in the S&P analysis. They say, and this is the administration's view, that S&P overestimated future deficits by $2 trillion because they made a miscalculation, getting complicated here, but from a Congressional Budget Office report.

The administration says S&P then acknowledged the mistake, went back and redid its analysis, but still came back this evening and said it was going ahead with the downgrade. I just talked to a senior administration official who was very frustrated, Anderson and he said -- remember this is embarrassing to the administration.

So you can understand the frustration here, he said, quote, "these guys made Congress look good." He said this is a damn the facts approach that the administration believes it countered with steady numbers and then the administration official shrugged and said, nothing we can do about it. We'll see what the markets do on Monday.

COOPER: And politically, John, obviously for the Obama White House, right or wrong, this is not good news at all? KING: It's embarrassing, to be the president of the United States, to have your credit rating downgraded. Obviously, the administration will say, Moody's didn't do this and Fitch didn't do it, the other two agencies. But here's the bigger risk. It's embarrassing for the president, Anderson. Today we just saw again, a relatively anemic.

People were cheering it because recent economic news has been so bad, but a relatively anemic unemployment report. The rate ticked down just a little bit. The last thing the president needs is any further uncertainty.

Bad news in the U.S. economy and guess what? This credit rating could and emphasis on "could", but if the government's borrowing is higher credit card interests could get higher. Mortgage rates could go higher.

So this could impact consumers out there even though they have nothing to do with this. This is their government. S&P's decision could impact consumers and if it slows consumer spending just a little, well, guess what, that slows the recovery just a little.

That hurts the president, not only as the president of the United States, it hurts him significantly as a candidate for re-election in which the slow economy and his promises to make things better are going to be the defining issue in the campaign.

COOPER: Allan Chernoff, how likely is it that Moody's might then re-assess things?

CHERNOFF: I don't think they're necessarily going to move because S&P has moved. Moody's came out this week after the deal was done between Congress and the president.

And they said we're not touching it just yet. Doesn't mean they may not move at some point in the future, but they may not move immediately just because S&P has.

COOPER: How quickly is it possible that they might re-assess this and if things improved, upgrade the credit rating?

CHERNOFF: S&P you're referring to?

COOPER: Yes, S&P.

CHERNOFF: That's not likely at all. This is really quite a damning report. So I don't think we can anticipate that at all. S&P is criticizing the political brinkmanship here. They're saying we seek, quote, "Americans governance and policymaking becoming less stable, less effective and less predictable than what we previously believed."

And then they go on to say, Medicare was barely touched in this deal and they say in the report that they believe cutting Medicare is key to long-term fiscal sustainability or at least, minor policy changes are not enough and we need to see changes to entitlement. We need to see that to have long-term fiscal stability.

COOPER: Is it possible, Allan, that government-backed things like Freddie Mac and Fannie Mae could be also downgraded?

CHERNOFF: Well, the dynamic is a little bit different there. So I don't think we're going to necessarily see an immediate impact. I mean, they have the implicit backing of the United States and of course, right now the U.S. does own those entities and there's so much money already invested in them. I don't think this necessarily leads to any impact on Freddie or Fannie.

COOPER: Allan, standby. John King, standby. We're going to bring in other. Our coverage is going to continue in just a moment. We're going to take a quick break. We'll be right back.

(COMMERCIAL BREAK)

COOPER: The breaking news tonight, credit rating agency, Standard & Poor's has downgraded the AAA, the pristine credit rating of the United States for the first time. It's now AA.

Joining us on the phone is John King. We also have Allan Chernoff and also David Walker, former comptroller of the United States. He's now the president and COO of the "Comeback America Initiative."

David Walker, in terms of hoping America comes back. This is certainly bad news. What was your reaction?

DAVID WALKER, FORMER COMPTROLLER GENERAL OF THE U.S. (via telephone): Well, I'm not totally surprised, Anderson. The fact is, that in April, S&P had a downgrade on the outlook for the U.S. credit rating. They made it very clear they were looking for at least a $4 trillion reduction in the projected deficit over the next 10 years.

And while Congress properly raised the debt ceiling limit to avoid a technical default, the deal they came up with is $2.1 trillion to $2.4 trillion and that's just not enough.

And so I'm not surprised, but I don't necessarily expect Moody's and Fitch to follow this immediately. They may wait to see what this Super Committee does.

COOPER: Do you think this changes anything? Do you think consumers are going to feel the impact of this in the short term?

WALKER: Well, the real question is, obviously, it has a psychological impact. This is the first time in the history of the United States we've not been a AAA credit rating, but the more practical thing is what it will do to interest rates.

And we won't know that until a few days because ultimately we need to keep in mind, for every 1 percent increase in interest rates, which is 100 basis points, that's about $150 billion a year additional interest for which we get nothing. So it's only time that will tell how we'll be affected and interest rates that affect the U.S. government can ultimately ripple throughout the economy, which is not good news given our weak economic condition already.

COOPER: So now the message you think for this for people on Capitol Hill, for politicians left and right, Republican and Democrat?

WALKER: The message is, they need to start doing their job and earning their pay. The fact is, it's been absolutely embarrassing how much time has been spent on raising this debt ceiling limit and then they punted on all the big four issues, Medicare, Medicaid, Social Security and tax reform. It's time to start making tough choices and we're all going to pay a price if they don't.

COOPER: John King is also joining us on the phone. John, in terms of the impact on Capitol Hill, right now Capitol Hill has adjourned. These folks are away for five weeks, any chance of this motivating them coming back? Or some sort of breaking of log jams? Breaking of this bottleneck?

KING: You won't see them come back, Anderson, from their recess. Not due back until after Labor Day, but David Walker made a very important point when he talked about this Super Committee. The deal that was just passed about $900 billion in deficit reduction now, the Super Committee is charged with coming up with at least $1.5 billion more.

Most people thought that's all they would do because of the contentious politics of this. We saw how difficult it was just to get this deal. The possible political impact of this S&P decision -- and this is what the administration was saying in the pushback that ultimately failed.

The administration was asking S&P, wait. Don't do this now. Wait and see how the Super Committee deal works out. They may trim Medicare. They may trim other entitlements. They may trim more spending. Let's make this decision in November or December, not now in August.

What it could do, Anderson, the committee is charged with at least $1.5 trillion. This is awe pretty strong argument to make that the floor, not the ceiling. Will they have the political will to go for $2 trillion more or $2.5 trillion more or $3 trillion more to get where S&P wanted to be originally in the $4 trillion range?

That requires a lot of political will months before we turn the calendar into a big election year. Not just presidential, but a congressional year. But that would be the political motivation now to say we need to get back to AAA and we better do a better job.

COOPER: And with a presidential election coming up, it is impossible not to talk about this as a political issue. Wolf Blitzer is joining us now.

Wolf, you can already hear, you know, you can imagine already politicians of all stripes are thinking of how they are going to talk about this on the campaign trail come this presidential election. How do you think this plays out?

WOLF BLITZER, HOST, "THE SITUATION ROOM" (via telephone): Well, I suspect the presidential candidates will all start blaming the president of the United States. They'll say, look, this happened on his watch. He's the commander-in-chief.

He's the president and he's to blame for allowing the United States, for the first time ever to see its AAA rating going down to AA and so they'll blame him.

They'll have another argument, the Democrats and president, look what the Tea Party activists have done by forcing the U.S. into this situation by avoiding the issue of tax reform, let's say, or tax revenue or increases for the wealthiest mention, eliminating the loopholes for the biggest corporations.

Subsidies and stuff like that so the argument we've been hearing, they are simply going to be intensified. It's going to heat up the campaign. I wonder if it will have an impact in terms of real legislation.

In terms of this proposed Super Committee, six Democrats, six Republicans, six members of the Senate and six members of the House, coming up tough decisions that presumably will maybe convince S&P to go back to the AAA rating.

COOPER: Wolf, I just want --

BLITZER: -- came up with a lot of tough decision, the Simpson- Bowles presidential commission - so there might some rethinking behind the scenes. But I'm sure the political debate, Anderson, is going to intensify.

COOPER: Wolf, hold on for just a moment.

ANNOUNCER: This is CNN breaking news.

COOPER: And at the top of hour. If you are just joining us, the credit rating, Standard & Poor's has downgraded the United States' long-held AAA credit rating, which is a pristine credit rating. It's now been downgraded to a double-A credit rating.

Ali Velshi is with us, John King, Wolf Blitzer, David Walker, Allan Chernoff.

Ali, for those who are just joining us and just following us and maybe aren't don't know the details of what S&P is all about -- just explain why this is important, why this is so bad, and what impact this is going to have on folks at home.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: OK, Anderson. Well, this was a threat made some time go, both S&P and Moody's had warned that if the United States doesn't get a handle on its long-term debt situation, they could face a downgrade. Now, after the debt deal got made last weekend, the credit agencies took a few days. They were in the conversations with the U.S. Treasury to determine what to do. Moody's subsequently came out and said the United States will maintain the AAA crediting rating that Moody's given it since 1917. So, the markets are waiting for the other shoe to drop.

Meanwhile, S&P was looking at the books. It does seem that they have made a calculation error in how much the U.S.'s deficit is going to be over the long term. That was pointed out to them by the White House and Treasury. Despite being found to have made an error, S&P is sticking by its decision and it's downgrading U.S. debt from AAA to AA-plus. It's going down by notch.

Now, in theory, Anderson, it's the same as your personal credit. In theory, if your credit rating goes down, if your risk increases, if you're likelihood of paying has decreased just a notch, you should pay just a notch more to borrow money. And as you know, the U.S. is a giant net borrower.

Now, what we're waiting to see right now is the effect on markets. Is this actually having an effect on U.S. borrowing? And will that trickle down in the cost for borrowing for companies and for people who want to buy houses, take business loans, car loans, credit card, student loans, and things like that. That is yet to be seen.

There's one caveat here, Anderson, and that is despite the fact that Fitch and Moody's and S&P are the preeminent credit ratings in the world, they did not execute themselves very well during the financial crisis. And as such, they have a little bit less credibility with some investors than they used to.

So, there are some investors saying, I'm not waiting for what S&P and what Fitch does in order to make a decision about whether to buy U.S. bonds. They -- U.S. bonds have been trading very actively in the last few days and interest rates have actually gone down. That may have more to do with the fact that European bonds have become more expensive.

So, we're watching to see what's going on --

COOPER: And, John King, you've been talking to your sources in and around the White House and in the administration about their reaction and they are certainly not happy about this.

JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT (via telephone): They're very unhappy. They say that when S&P sent the analysis, I'm told the Treasury Department received it at 1:30 this afternoon. And I'm told that Treasury analysts quickly caught a mistake. They say the S&P projection of U.S. deficits over the next 10 years was $2 trillion off.

And, so, again, I'm told and consider the source, the administration official, and they're not happy tonight. But he says that S&P said, oh, you're right, actually and we'll redo our analysis. But then they came back and said, but we still believe, structurally, this deal isn't big enough. We still believe the politics of Washington are a mess. We still believe this is not a credible enough plan. Therefore, we are going ahead with our downgrade.

And so, you're at this point. And consider what Ali just said, Anderson, if this increases the government's borrowing costs at all, at the same time, it diminishes what the administration has just done which is make a modest down payment on deficit reduction because the administration still has to borrow money.

The one administration sense of relief and that may be too strong of a phrase, to Ali's point, is that when you look around the world right now, what alternative do investors have if you're looking at other bonds around the world? Because the European Union and individual European countries are in such trouble right now, they still believe and the last week has proven despite all our turmoil here, that the U.S. treasury is still -- I'm going to call it the gold standard -- that's what it was yesterday. Maybe it will be gold minus standard on Monday morning, but they still believe it's the best in the market.

COOPER: And, Wolf Blitzer, who's also joining us. Wolf, politically, how does this affect the bickering in Congress that we've seen? I mean, Congress is adjourned now. But when they come back, will this -- will this kind of break that up? Will this get things moving, especially for that super committee who is tasked with coming up with further cuts?

I think we lost Wolf.

John, do you think it will? We talked a little while ago. Do you think it will make a difference? Will this spur people to compromise, to come up with some sort of solution?

KING: It will make a difference in that it gives you a crystal clear flashing neon light emphasis that you must do more. And the super committee created as part of the compromise deal this week has a floor. It has to come up with $1.5 trillion in future deficit reduction -- $1.5 trillion with a "T." That's the floor. It can go higher if it wants.

Now, most assumed it would do the minimum because finding the spending cuts, finding possible revenue increases, we saw what happened in the last few weeks. It is almost impossible with a Democratic president and Democratic Senate, a Republican House and virtual Republican veto power in the Senate. It was almost impossible. That's the gridlock Standard & Poor's cites in making its decision.

Now that the United States has been embarrassed and, yes, the president is most embarrassed. He's the president. But the United States has been embarrassed, and the Republicans are part of the governing coalition in the United States right now.

Perhaps there will be a political momentum to say let's do more. Let's be bolder. Let's prove our credibility. I can see that at the beginning. The problem is, let's say they say -- let's not go for $1.5 trillion. Let's go to $2.5 trillion or even $3 trillion. It's a noble goal, Anderson. It's probably the right goal.

I think you still have David Walker with you. He knows a lot more about this than I do.

The question is to get to that higher number, you're going to cut more domestic spending, Pell grant, that's student loans, student aid, that's food stamps.

You're going to have to cut deeper at the Pentagon. New defense secretary said this week, no way, you can't cut more.

You're going to have to cut Medicare and Social Security, even more risky and probably going to have to raise some taxes, which the Republicans say not only no, forgive my language, they say "hell no."

COOPER: And that, of course, is the biggest sticking point of all between the parties at this point.

Our coverage is going to continue and we're going to have a lot more at the top of the hour at "A.C. 360" at 10:00 East Coast Time. We'll talk with John King and Ali Velshi and David Walker and others. I want to thank all of you for joining in. Allan Chernoff as well, thank you very much.

In a moment, Piers Morgan will continue. I'll see you at the top of the hour, about 50 minutes from now, "A.C. 360" at 10:00 Eastern Time. Piers Morgan in a moment.